TRADE HUB AND AFRICAN PARTNERS NETWORK

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1 TRADE HUB AND AFRICAN PARTNERS NETWORK VALUE CHAIN ASSESSMENT REPORT: SHEA Contract No.: AID-624-C May 2014 This publication was produced for review by the United States Agency for International Development. It was prepared by Abt Associates Inc. for the Trade Hub and African Partners Network.

2 Recommended Citation: Trade Hub and African Partners Network. Value Chain Assessment Report: Shea. Prepared for the Trade Hub and African Partners Network by Abt Associates Inc., Bethesda, MD, in collaboration with J.E. Austin Associates, Arlington, VA, May Submitted to: Brinton Bohling, Chief, Office of Trade and Investment (+233) No. 24 Fourth Circular Rd, Cantonments Accra, Ghana Abt Associates Inc Montgomery Avenue 1 Suite 800 North 1 Bethesda, Maryland T F With: Banyan Global J.E. Austin Associates Kanava International SSG Advisors

3 TRADE HUB AND AFRICAN PARTNERS NETWORK VALUE CHAIN ASSESSMENT REPORT: SHEA Contract No.: AID-624-C DISCLAIMER The authors views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development (USAID) or the United States Government.

4 CONTENTS Acronyms... iv Acknowledgements... v 1. Introduction and Background Methodology Value Chain Assessment Process and subsequent steps Sources of Information Data Limitations Description of the Value Chain Products Included in the Value Chain Value Chain Map Product Flow Map Shea Data and Information Main Actors in the Value Chain Description of the Value Chain Actors Relationships Between Key Actors Opportunities and Issues Discussion of Value Chain Assessment Criteria Market Information Contribution to Economic Growth Potential to Increase Trade Potential to Create Jobs Potential to Attract Investments Potential to Generate Value Addition Potential to Generate Market-Based Improvements in Production Yields Impact on Food Security Social Impact Competitiveness Factors that Would Support Upgrading Champions for Change access to Finance Productive Infrastructure Value Chain Assessment Report: Shea i

5 4.6.4 Synergies with Existing Programs Policy Environment Climate Resilience and Environmental Sustainability Other Hurdles to Success SWOT Analysis Vision and Upgrading Strategy Vision Upgrading Strategy Risks and Mitigation Additional Information Needed Annex 1: Bibliography Annex 2: Persons and Organizations Interviewed Value Chain Assessment Report: Shea ii

6 LIST OF TABLES Table 1: Highest Outcome-Level Results... 3 Table 2: Steps in Value Chain Assessment and Final Selection... 4 LIST OF FIGURES Figure 1. Value Chain Map: Shea... 7 Figure 2. Product Flow Map: Shea... 8 Figure 3. Current Data and Information: Shea... 9 Value Chain Assessment Report: Shea iii

7 ACRONYMS AAK ACTE ADM ARSO CBI CECI CRIG ECOWAS EU FFA FAOSTAT FDA FOB FTF GRAS GSA ICRAF MT NGO SNFS SNV UEMOA USAID USDA VSLA WATH AarhusKarlshamn AB Africa Competitiveness and Trade Expansion Initiative Archer Daniels Midland Africa Regional Standards Organization Cocoa Butter Improver Centre for International Studies and Cooperation Cocoa Research Institute of Ghana Economic Community of West African States European Union Free Fatty Acids Food and Agricultural Organization Corporate Statistical Database Food and Drug Administration Free On Board Feed the Future Generally Recognized As Safe Global Shea Alliance International Centre for Research in Agroforestry (World Agroforestry Centre) Metric Tons Non-Governmental Organization Shea Nut Farmers Societies Netherlands Development Organization West African Economic and Monetary Union United States Agency for International Development United States Department of Agriculture Village Savings and Loan Association West Africa Trade Hub Value Chain Assessment Report: Shea iv

8 ACKNOWLEDGEMENTS The following people contributed to the preparation of this report: Eliot Masters (researcher and author), Martin Webber, and Bill Noble. Editing support was provided by Deborah Dangay, Victoria Okoye and Leah Quin. Special thanks to those organizations that provided information used in the preparation of this report. Value Chain Assessment Report: Shea v

9 1. INTRODUCTION AND BACKGROUND SHEA VALUE CHAIN A nutritional and economic resource for women across Africa, the shea butter tree (Vitellaria paradoxa) provides an annual bounty of fruit, food-oil and cash income for an estimated 10 million households ranging from eastern Senegal to northern Uganda. For centuries, shea has been traded across the West African region. Today, shea butter is a global commodity, and its derivate fractions appear all types of consumer products, from edible confectioneries to high-end skin care and cosmetic products. This report describes a value chain that has already received substantial investment. Prospects remain favorable over time, yet not dramatically so, with consolidation of previous investments by the United States Agency for International Development (USAID) and other donors. In support of the shea products value chain of West Africa, the Trade Hub and African Partners Network (Trade Hub) will work primarily, if not exclusively, in partnership with the Global Shea Alliance (GSA), an established regional apex organization. VALUE CHAIN ASSESSMENT Following from the Selection Report, the Value Chain Assessment Reports are the second step in planning activities for the Trade Hub. The assessment phase took place during May Assessments were carried out for each value chain recommended for targeted for partnership with and support from the Trade Hub. The Value Chain Selection Reports provide brief overviews of each value chain; the Assessment Reports offer deeper perspectives about the current status, structure, performance, and challenges of the value chain. They update previously available information where possible. Based on this information and analysis, they recommend a vision and upgrading strategy for each value chain, and outline possible support roles for the Trade Hub in helping value chain stakeholders achieve their strategy. As the first opportunity for the Trade Hub team to resume interacting with industry stakeholders and begin identifying lead firms and areas where the project can have a positive impact, the value chain selection and assessment process also provides an initial basis for dialogue and brainstorming/planning with key sector and value chain stakeholders. The phase, nonetheless, provides only a brief glimpse at each value chain and serves as a vehicle to commence discussion and share ideas with partners. The assessment is not a detailed value chain analysis. ABOUT THE TRADE HUB AND AFRICAN PARTNERS NETWORK USAID/West Africa s strategic goal is to support the emergence of a politically stable and economically prosperous West Africa. The Trade Hub s goals are to promote increased regional trade in key Value Chain Assessment Report: Shea 0

10 agricultural commodities (a goal of Feed the Future, or FTF) and to reduce poverty through value-added exports (a goal of the Africa Competitiveness and Trade Expansion Initiative, known as ACTE). The overall objective of the Trade Hub is to increase the region s share of world trade by increasing exports at a faster rate than the rate of growth in overall trade, and by improving West Africa s international private sector competitiveness in targeted value chains other than extractive industries. The project will achieve two intermediate results: 1) improve the private sector capacity of the region s farmers and firms by addressing constraints to targeted value chains; and 2) improve the business enabling environment by addressing economy-wide constraints such as the transport and trade barriers that affect the efficiency of the region s ports, corridors, and borders. At its heart, USAID/West Africa s Trade Hub and African Partners Network is a capacity building effort that will entail working with several key groups of African partners. The project s focus will be on developing associations and regional alliances that can act independently from donor support and take on a greater leadership role in promoting reforms, attracting buyers and investors, and adopting improved practices. The project will also work with individual companies that have a regional scope and could serve as lead firms in targeted value chains. The Trade Hub will achieve its objectives by improving the private sector competitiveness of certain value chains. Based on the initial assessments made in USAID/West Africa s Feed the Future Multi-Year Strategic Plan, five value chains were pre-selected for the project: rice, maize, millet/sorghum, livestock (cattle), and livestock (sheep and goats). They were selected based on the following criteria: importance to intra-regional trade, high potential for value addition, production by a large number of stakeholders, and synergies with other supported value chains. The Trade Hub team also examined the development potential of other value-added value chains and selected several for inclusion in the project s set of targeted value chains. This selection was based on six high level criteria: Potential to increase trade Potential to create jobs Potential to attract investments (including from the U.S.) Number of households participating Extent of geographic dispersal in West Africa Current level of exports to global markets Value Chain Assessment Report: Shea 1

11 The assessment phase thus focuses on the following value chains: FTF Regional Value Chains Maize Millet-Sorghum Rice Cattle Small ruminants Value-added Global Value Chains 1 Apparel Cashew Honey Mango (and possibly other cut fruits/vegetables) Sesame Shea West Africa is on the verge of a transformative change if it can create a new dynamic for intra-regional and export trade. At present, intra-regional trade is inefficient, characterized by unpredictable distortions and uncompetitive practices, and subject to overly restrictive regulatory regimes. West African exports have limited success in the global marketplace due to poor product quality, inconsistent supply, and high delivery prices, which can be traced back to the absence of economies of scale, high transaction costs, and a poor enabling environment. The Trade Hub and African Partners Network aims to promote broader, more sustainable growth by improving private sector capacity and the policies, rules, and practices that govern regional and external trade. This will achieve sustainable and measurable increases in regional and international exports, jobs, and investment by strengthening vertical and horizontal integration within value chains, assisting representative associations to become more effective and inclusive, and improving the enabling environment for trade. The project will also mount a cross-cutting effort to increase the professionalism of all major participants by providing role-specific competency training, facilitating access to modern technologies, and improving market linkages. The Trade Hub will: Leverage and strengthen already-identified or new private sector and public sector partnerships for commercial and development activities. Target the highest-impact opportunities in the value chains and policy regimes, to alleviate specific constraints hindering private sector growth. The cornerstone of our structured approach to value chain development is identifying, in collaboration with our for-profit value chain partners and our public and nongovernmental organization (NGO) partners, where highimpact change can be achieved to maximize the return on project resources. Our trade and transport enabling environment staff will target specific policy and regulatory constraints which, once changed, will open up regional and external markets, reduce seasonal blockages, lower supply chain friction, and encourage trade-based investment and growth. They will work closely with stakeholders to advocate and enforce reforms. The Trade Hub s higher-level results targets are summarized in Table 1 below. 1 The home décor value and fashion chain was handled differently. A limited Trade Hub initiative is recommended for home décor and fashion. An assessment was not conducted for this value chain as it was no longer considered for a core Trade Hub focus. Value Chain Assessment Report: Shea 2

12 Table 1: Highest Outcome-Level Results Results Through Year 3 Through Year 5 Increase in the value of global and regional transactions, on average, in targeted sectors of livestock, grains, and value-added products in West Africa 30% 50% Creation of new jobs in Trade Hub-assisted West African firms 15,000 23,000 Facilitation of new investment in targeted sectors $62.5m $102.5m Because different partners have different needs and levels of maturity, the project will tailor upgrading activities to each partner. We have recommended and will select value chains that offer opportunities to substantially contribute to achieving these objectives. We will choose value chains that can benefit from Trade Hub-supported activities such as: Improved buyer-seller intermediation Expanded use of grades and standards Increased access to and use of market information Increased access to and use of financial services More competitive transport and logistics enabling environment Reduced legal and regulatory barriers to trade Value Chain Assessment Report: Shea 3

13 2. METHODOLOGY This Value chain assessment is the second of three phases that will lead to agreement on the Trade Hub s targeted value chains: 1. Phase I: Select (recommend) value-added value chains 2. Phase II: Assess selected value chains 3. Phase III: Vet and obtain feedback, leading to confirmed selection Eleven separate value chain reports present the findings of each value chain assessment. As part of the research for the assessment reports, subject matter experts collected and updated data and trend information relevant to each of the value chains. The value chain assessments use a common set of criteria to describe the short-listed value chains and update information about them. In contrast to the selection process (which used subjective measures of only certain criteria based on expert opinion), the assessment utilizes the full set of criteria, quantifying them as much as possible. Based on this analysis, the report discusses strategic approaches that could be supported by the Trade Hub to achieve the vision of the value chain. The existing value chain studies and their conclusions were strongly considered in the assessment, and meetings and phone/internet discussions were held with knowledgeable stakeholders. (Given time constraints, the team did not collect primary market data from the field or hold extensive interviews with a full roster of key informants.) During the assessment, the team also began to analyze and discuss with stakeholders the opportunities and challenges for each value chain and make initial proposals for an upgrading strategy. If the stakeholders and the Trade Hub are able to identify a clear path for upgrading the value chain, it is more likely that the value chain will be ultimately included in the Trade Hub s set of focus value chains. 2.1 VALUE CHAIN ASSESSMENT PROCESS AND SUBSEQUENT STEPS Table 2: Steps in Value Chain Assessment and Final Selection Task Assess short-listed value chains Obtain USAID/West Africa s feedback on Value Chain Selection Report Submit Value Chain Assessment Report Method Assess the five preselected value chains and the other selected value chains against a full set of criteria through desk studies, review of existing value chains studies, and key informant interviews with partner network Review Value Chain Selection Report; meet with value chain Development Specialist and value chain team Assess all value chains, obtaining data and information through value chain studies, desk research, and key informant interviews; include discussion of potential value chain vision, upgrading strategy and Trade Hub intervention Value Chain Assessment Report: Shea 4

14 Prepare facilitation guide for value chain stakeholder vetting Vet value chain selection and assessment with stakeholders Refine value chain selection and assessment, based on stakeholder feedback and suggestions Based on the assessments, prepare summary presentation and process for vetting value chains Hold session within Project Partners Kick-off Workshop with Trade Hub stakeholders Continue interacting with key stakeholders and USAID as required The final selection will only take place after the official Project Launch event, which will take place on or shortly after July 15, Immediately following the Launch the Project will engage individual value chain partners to discuss and vet the Assessments and come to a common vision of the value chain and how the Project will work with them. The final action plans for each value chain will be set after the engagement meetings, and will take into account the stakeholder feedback. 2.2 SOURCES OF INFORMATION This report was written primarily from the knowledge of the author, who has worked very actively on technical and market issues in the shea value chain for well over two decades. Trade data has been drawn from secondary studies and publications including grey literature, and from interviews conducted over the past several years with key informants of the private sector in West Africa. In addition, the author benefited from attendance at the recent GSA conference in New York City on May 12, 2014, at which relevant presentations were made by a number of GSA members. 2.3 DATA LIMITATIONS Though shea appears in the Food and Agricultural Organization Corporate Statistical Database (FAOSTAT) as Karite Nuts (Sheanuts) there is limited trade data available. Because of this the production data is neither very meaningful nor relevant. Data are often based on estimates of natural production, which in many cases remain consistent year to year. However, these estimates do not take into account natural variability in the yield and the proportion of the total annual production that is harvested. Available trade estimates quoted in secondary literature are often cited to an individual expert and not on actual trade records, recognizing that a significant proportion of cross-border trade is undocumented. Value Chain Assessment Report: Shea 5

15 3. DESCRIPTION OF THE VALUE CHAIN 3.1 PRODUCTS INCLUDED IN THE VALUE CHAIN The shea butter tree (Vitellaria paradoxa, syn. Butryospermum paradoxum) is a slow-growing fruit tree indigenous to the Sudanic savanna of sub-saharan Africa. The tree occurs in a narrow band of vegetation extending some 5,000 km, from Senegal in the west to Uganda and Ethiopia in the south and east of the range. The shea tree provides an annual bounty of nutritious fruit to rural communities during the annual hungry season. The seeds of the shea fruit are large kernels with a high percentage of edible oil, known as shea butter, which is a very important nutritional and economic resource for households and communities across the shea parkland savanna. Shea has been documented as a trade commodity both an inedible oil and skin care treatment locally, and a unique luxury item of considerable value in regional trade as far back as the 14 th century. Products included in the value chain are shea kernel and its derived lipid fraction; shea butter, consisting of oil and fat components; as well as a non-lipid (unsaponifiable) fraction, including bioactive compounds such as triterpene alcohols. Though the tree is endemic to 16 countries across Africa, well over 90% of globally traded shea products originate in Ghana, Mali, Burkina Faso, Ivory Coast, Togo and Benin. Though the Nigerian shea parkland is vast, however only shea from the western side of the Niger River Valley has an adequate stearin (fat) content. Shea from the east of the river is unwanted by exporters since it has a much lower stearin content and is not sought by international buyers. The stearin component of shea butter, isolated by a process of industrial fractionation, is the main valueadded product traded internationally - constituting about 90% of global trade in shea products. Shea stearin is used primarily in confectionery as a cocoa butter equivalent or cocoa butter improver. Unrefined shea butter also contains bioactive unsaponifiable (non-oil/fat compounds), which have highvalue applications in skin-care. Throughout much of Africa, shea butter is extracted and sold in bulk at low prices and without regard for quality. In Ghana, where product quality control and quality assurance is emphasized, a wellestablished production chain exists. Ghana has become a preeminent exporting nation for shea products over the past 15 years, and the country serves as a conduit for regional shea exports from neighboring countries (Mali and Burkina Faso in particular). The Ghanaian market share for shea kernel in particular rose dramatically, accounting for an estimated 86% of all shea kernel exports from West Africa. Throughout the rest of the region, shea butter is extracted and sold in bulk at low prices and without regard for quality. Value Chain Assessment Report: Shea 6

16 3.2 VALUE CHAIN MAP Figure 1. Value Chain Map: Shea Source: Global Shea Alliance (2013) Value Chain Assessment Report: Shea 7

17 3.3 PRODUCT FLOW MAP Figure 2. Product Flow Map: Shea Source : Scholz (2010) after Derks and Lusby (2006) Value Chain Assessment Report: Shea 8

18 3.4 SHEA DATA AND INFORMATION Figure 3. Current Data and Information: Shea Source : Food and Agricultural Organization Corporate Statistical Database (FAOSTAT) (2014) Shea kernel exports are mostly sent for industrial extraction and fractionation into olein and stearin, of which the latter is used as a cocoa butter improver (CBI) for chocolate sold in the (EU). The specific countries that allow its manufacture include the United Kingdom, Denmark, Sweden, Portugal, Ireland, Russia and Japan (3F 2010). While shea kernel has historically comprised some 95% of shea exports from the African continent, prior to establishment of the Archer Daniels Midland (ADM) complex at Tema, current trends point to an increasing export share of shea butter (and its fractions, as more finished products) to serve global markets. Brazil is a fairly new shea-consuming country; its chocolate industry allows for admixture of shea butter as a cocoa butter improver, and several cosmetics companies currently use shea butter in their product lines. Unrefined shea butter has defined a distinct and growing market niche on the global cosmetics market. According to West Africa Trade Hub (WATH) estimates, the natural cosmetics segment comprises about 5% of the $200 billion global cosmetics sector. Growth of this segment has been fairly consistent at 15-25% per annum: From an estimated $3.9 billion in 2006, the figure is expected to exceed US$10 billion [in] 2010 (WATH 2010). While export figures are notoriously unreliable, in 2013, the GSA estimated that 350,000 MT of shea kernel are exported from Africa annually, with a market value of approximately $120 million (based on current prices of about $450 MT free-on-board (FOB) and used for the preparation of around 60,000 MT of stearin (the solid fat fraction). Major exporting countries include Ghana, Burkina Faso, Côte d'ivoire, Mali, Benin, Togo, and Nigeria. Value Chain Assessment Report: Shea 9

19 3.5 MAIN ACTORS IN THE VALUE CHAIN DESCRIPTION OF THE VALUE CHAIN ACTORS Lead Firms Historically the shea value chain was characterized by bulk exports of shea kernel for extraction, refining and fractionation on a tolling basis at one of two European-owned facilities by one of three major European buyers (Karlshamns AB of Sweden; Aarhus United A/S of Denmark; or IOI/Loders Croklaan, a Netherlands-based subsidiary of IOI Corporation of Malaysia). These firms accounted for more than 90% of African shea exports. Ghana has long been favored by these buyers as the origin of highest quality (including the high fat content of Ghanaian provenances) as well as for the reliability and ease of commerce. Since the early 2000s, Burkina Faso has also become a source, with procurement centered in Bobo Dioulasso; shea kernel is also drawn from the Sikasso region of Mali. In 2005, Aarhus and Karlshamns merged to form AarhusKarlshamn AB (AAK), a Swedish-Danish company, thus narrowing the shea supply chain to two major suppliers. More recent entries to the West African shea market include 3F Africa, the West African subsidiary of the Indian Foods, Fats and Fertilizers group of companies, which exports large volumes of shea kernel to India for extraction, fractionation and re-export as shea stearin for confectionery. A year after the AAK merger, the West African shea market was further rocked by the sudden entry of the Ghana Specialty Fats facility at the Ghanaian port of Tema, a $20 million joint venture between Archer Daniels Midland and Singapore's Wilmar Holdings, with an annual processing capacity of 25,000 MT of shea kernel. This development also contributed to the spike in shea prices in ADM/Wilmar produces shea stearin for export as a food ingredient destined mainly to the European confectionery industry, with some sales of shea olein as a food or cosmetic ingredient. Developments over the past decade include a consolidation of the three industry leaders in European export to two companies, and an increase in industrial extraction within the West Africa region particularly in Ghana, which serves as the de-facto supply depot for West Africa given the quality of its shea kernel (a trickle over effect of quality systems and infrastructure invested in the cocoa value chain). Further investments in regional extraction capacity will be leveraged, but also investments in secondary processing such as neutralization, fractionation and deodorization, working with industry leaders within West Africa such as Ghana Nuts (Ghana), Fludor (Benin) and Nioto (Togo) and tolling extraction facilities such as the Shebu facility at Savelugu (Ghana), formerly serving Loders Croklaan. Industrial processing capacity is limited elsewhere in the region, with derelict or underutilized facilities in Senou (outside of Bamako, Mali) and in Ouagadougou (Burkina Faso). Given their decades-long implication in the shea industry, AAK and Loders Croklaan hold indomitable market knowledge and access MSMEs Given the dynamics of its production, there are many hundreds if not thousands of micro-enterprises based on shea across Africa, from women s groups which collect and process shea to formulators of skin-care products. Under the Trade Hub project, additional micro, small and medium enterprises (MSMEs) will be encouraged to develop direct commercial relationships with national exporters and international buyers; the Trade Hub can play an important role in building such commercial relationships based on development of mutual confidence over time. Value Chain Assessment Report: Shea 10

20 3.5.2 RELATIONSHIPS BETWEEN KEY ACTORS Horizontal linkages exist primarily at the primary production level, including groups (usually women s groups) engaged in collection and drying of shea kernel and groups (usually women s groups) involved in extraction of shea butter for household collection and local, national or export-oriented marketing of surplus production. Vertical linkages between these entities (and individual collectors and processors) include loose arrangements oriented around local and regional markets, as well as more formal long-term arrangements between producer groups and associations and international market leaders including the Body Shop (in Ghana) and l Occitane (in Burkina Faso). Other, less formal vertical linkages exist between rural producers, producer groups and associations and market traders, as well as purchasing agents for industrial buyers (e.g. Ghana Nuts, as well as multinational actors including AAK, Loders Croklaan, Olam and 3F) OPPORTUNITIES AND ISSUES The market demand for shea butter of African origin is currently estimated at roughly 5,000 to 8,000 MT per year, mostly to Europe (including both the UK, where Body Shop established its global foothold, and the continental mainland, where shea butter was largely popularized by the French company l Occitane) - and the USA, served by a broad multiplicity of suppliers. Direct shea butter exports to Canada are typified by 10,000 Villages, which sources its butter directly from the same Burkinabe producers cooperative which supplies l Occitane, with facilitation of the Canadian NGO Centre for International Studies and Cooperation (CECI). Further upstream, traders who collect and consolidate purchase of shea kernel and shea butter from the rural production areas operate on very low margins, often fronting their own meager capital to facilitate bulk procurement serving industries and exporters. However, as detailed elsewhere in this report, recent proprietary procurement models approximating warehouse receipts (including the one supported by SNV in the Upper West region of Ghana, whereby producers obtain better prices for their products under collective storage arrangements) may have scope for scaling up, with further engagement of market leaders and other firms. Perhaps the most promising avenue for upgrading at the primary producer (including increased incomes and employment) level is the increasing recent awareness and rising market demand for unrefined shea butter as a new and growing niche product. As recently as 2005, buyers for cosmetic manufacturers and formulators were exclusively interested in refined shea butter - an odorless, hard white fat while shea butter prior to its refining and deodorizing was commonly termed crude shea butter in both French and English. In 2005, a regional process to establish product quality grades and standards was undertaken by the World Agroforestry Centre (ICRAF) and its national partners under the ProKarité project, supported by the Common Fund for Commodities and the UN Food and Agriculture Organization. In June of 2005, these standards were adopted by the West African Economic and Monetary Union (UEMOA) of francophone West Africa. Over the next two years, ICRAF and the Ghana Standards Board (also representing ECOWAS) scaled up adoption of the standards to the inter-governmental and regional level, with approval in July 2007 by all 16 shea producing countries under the aegis of the Africa Regional Standards Organization (ARSO). An important aspect of these standards was the formal designation of unrefined in place of crude to define natural shea butter, which (of sufficient quality) has no inherent need of further processing to serve even the highest-value product and market applications. Value Chain Assessment Report: Shea 11

21 Awareness (and enforcement) of these regional standards has to date been inconsistent at best even in Ghana, which took such a lead in their development based on existing Ghana standards) never the less, the standards do provide formal, science-based quantitative grading systems for both shea kernel and butter which define quality parameters and values for use in international trade (Shea Standards 2007). In this context, market adoption of unrefined shea butter as a sought-after commodity shows that the global market for shea butter has evolved in recent years, to recognize the quality improvements made at the village level in the producing countries most notably in Uganda (where unrefined shea butter of the Nilotica variety was developed as a niche product in the mid-1990s), and in Ghana. In general, issues of product traceability, quality assurance and the willingness of lead firms to offer price premiums based on product quality are key considerations but the situation and prospects for upgrading differ widely according to country of origin. Value Chain Assessment Report: Shea 12

22 4. DISCUSSION OF VALUE CHAIN ASSESSMENT CRITERIA 4.1 MARKET INFORMATION Shea is a bifurcated commodity 2 in that it is both a low-value industrial feedstock and a high-value cosmetic ingredient. Shea exhibits locally specific dynamics of supply and demand that vary widely across the production zone, and may appear paradoxical (e.g. the fact that shea is more highly valued and thus producers receive higher unit prices in areas most removed from global trade, where prices are negotiated directly between local producers and local consumers). The totality of shea products in global trade may be seen as a pyramid. A broad base of dried shea kernel of indifferent quality is derived from fresh shea fruit by rural women (about 620,000 MT per annum). More than half of this is consumed at the household and local level as a food oil, while the surplus (about 40% of the harvest) is traded downstream. About 80% of the traded shea is exported to Europe, Asia and the BRIC countries as a raw commodity and subsequently processed into shea stearin and its by-products. Only about 20% of the harvest is processed in Africa and exported as shea butter. Ghana, serving as a conduit for regional shea exports from neighboring countries (Mali and Burkina Faso in particular), has become the preeminent exporting nation for shea products and the worldwide leader for 14 of the past 18 years. Ghana s market share for shea kernel accounts for an estimated 86% of all shea kernel exports from West Africa though it should be noted that a significant proportion of Ghanaian exports originates in Mali, Burkina Faso, Togo, and Benin. Burkina Faso is significantly behind, ranking second among the other producing countries. Although Nigeria s shea parkland is vast, its shea is less globally desirable: An adequate stearin content is found only in shea kernel found in the western side of the Niger Valley; shea east of the Niger River has a much lower stearin content and is not sought by international buyers. In recent years, unrefined shea butter has defined a distinct and growing market niche on the global cosmetics market. According to WATH estimates, the natural cosmetics segment comprises about 5% of the $200 billion global cosmetics sector, but growth of this segment has been fairly consistent at 15-25% per annum in recent years, with growth from an estimated $3.9 billion in 2006 expected to exceed US$10 billion [in] despite the global financial crisis. 2 Chalfin, B. (2004). Shea Butter Republic - State Power, Global Markets, and the Making of an Indigenous Commodity. New York, London. Routledge. 3 WATH (2009): The Shea Value Chain: A uniquely African industry. USAID / West African Trade Hub (WATH): Accra. Value Chain Assessment Report: Shea 13

23 4.2 CONTRIBUTION TO ECONOMIC GROWTH POTENTIAL TO INCREASE TRADE The market demand for shea butter of African origin is currently estimated at roughly 5,000 to 8,000 MT per year, mostly to Europe (including both the UK, where Body Shop established its global foothold, and the continental mainland, where shea butter was largely popularized by the French company l Occitane) - and the USA, served by a broad multiplicity of suppliers. Direct shea butter exports to Canada are typified by 10,000 Villages, which sources its butter directly from the same Burkinabe producers cooperative which supplies l Occitane, with facilitation of the Canadian NGO CECI. Further upstream, traders who collect and consolidate purchase of shea kernel and shea butter from the rural production areas operate on very low margins, often fronting their own meager capital to facilitate bulk procurement serving industries and exporters. There are recent trends toward proprietary procurement networks, such as those established Loders Croklaan in Bobo Diolasso, Ghana Nuts in the northern regions of Ghana (which includes indirect benefits such as medical insurance for traders and producers), and the warehouse receipt system and village savings and loan association (VSLA) model of AK (with SNV) in the Upper West region of Ghana. There is scope for bringing these traders together more formally as a trade association, possibly to be integrated with other professional platforms supported by the GSA. An effort was made to complete a Revealed Comparative Advantage analysis for the shea sector. Unfortunately, this was not possible as the available data is too old and unreliable for this purpose POTENTIAL TO CREATE JOBS As of 2009, it was estimated that 3 million West African women are involved in shea export (WATH 2009 in Scholz 2010), with a host of mostly male intermediaries serving as aggregators of shea kernel for industrial procurement, regional trade and export. Employment is likely to be generated by investment in rural collection and processing enterprises, which rely on hundreds or thousands of collectors (nearly all women) and dozens or hundreds of artisanal processors, according to the processing technology used to obtain the end product. Generally speaking, purchase of unrefined shea butter from rural producers is more remunerative to primary producers (and generates more employment, mostly female) as compared to aggregated trade of the raw material for industrial processing. As women s processing groups average between 25 and 50 members, it can be estimated that increased employment through investment in processing in support of direct purchase arrangements will result in considerable (if seasonal) employment POTENTIAL TO ATTRACT INVESTMENTS The scope for large-scale investments in the shea value chain is closely linked to potential for increased demand for shea kernel as a United States Department of Agriculture (USDA)-approved ingredient in US chocolates. Tangible progress about this may not be forthcoming not in the short term as the United States Food and Drug Administration (FDA) approval process takes from 3-5 years, and the application for consideration was submitted in December Torrey Cope, personal communication 2014 Value Chain Assessment Report: Shea 14

24 4.2.4 POTENTIAL TO GENERATE VALUE ADDITION Shea kernel exports are largely destined for industrial extraction and fractionation into olein and stearin, of which the latter is used as a CBI for chocolate sold in the EU. Though there is very little scope for value addition in the shea kernel trade, there is considerable scope for value addition in shea butter trade through improved processing methods - primarily for high-quality shea butter. Demand for natural cosmetics is projected to rise exponentially during the coming decade despite global economic woes (somewhat counter-intuitively, demand for expensive cosmetics is positively linked to economic uncertainty). The demand for shea butter can only be expected to follow suit. Global consumer awareness of and demand for shea butter in skin care has shown spectacular growth since 2000 (mostly prior to the global financial crisis of 2008). It is doubtful if this trend can reasonably be expected to continue at quite the startling rates of 10% per annum, however. Moreover, companies engaged in production of cosmetic formulations using shea butter often formulate using very small quantities of shea butter to reduce costs. There is however clear scope for aggregation of smaller-scale production models. This would include investment in supply chains linking rural producers with bulk and industrial buyers as well as investment in higher-value niche markets for high-quality locally-processed unrefined shea butter of specific origins While sourcing arrangements for locally-produced shea butter as a commodity have increased, there has been very little investment in small and medium production enterprises serving regional and global markets, particularly outside of Ghana. Clearly there is scope for more direct investment in small- and medium-scale production enterprises at the rural and peri-urban levels across the shea producing countries and nowhere more so than in the sleeping shea giant of Nigeria and also Cote d Ivoire, two countries where the shea value chain remains largely a potential prospect POTENTIAL TO GENERATE MARKET-BASED IMPROVEMENTS IN PRODUCTION YIELDS Not applicable. The shea tree is naturally-occurring (a wild species), and there is an overall regional surplus in supply, more pronounced in some countries of origin (e.g. Nigeria in particular). 4.3 IMPACT ON FOOD SECURITY About 10 million households across Africa (and at least 5 million in the ECOWAS zone of West Africa) rely on shea butter as a dietary lipid (food oil) of primary importance to household food security. The majority of this is processed in the home and sold on local and regional markets, thus providing an important source of income used to meet household financial requirements. It is estimated that about 30% of household income in shea producing households derives from the sale of surplus shea products (shea kernel and/or shea butter). 4.4 SOCIAL IMPACT Shea is the domain of rural women, including poor and vulnerable rural households and those headed by women, providing a valuable source of nutritious fruit and food-oil. Complementary to its consumption within the household, economic returns from the production and marketing of shea products also greatly enhance household food security, multiplying nutritional options for the rural poor through Value Chain Assessment Report: Shea 15

25 increased market access to cereals, pulses and livestock. There is scope for involvement of youth (young women in particular) in collection, processing and marketing of shea products. 4.5 COMPETITIVENESS West Africa can be expected to maintain its preeminent position as origin of global shea exports (due to production volume and pricing structures), but there is absolutely scope for increasing the competitive footing of individual countries. It is important to note that the prospects for each country vary considerably according to geography, phyto-chemistry and traceability, product quality (and national reputation thereof) and ease of doing business. There are countries and areas of origin with particularly distinct potential for increasing global demand through increased traceability, producer upgrading and quality assurance. Across Nigeria, where the vast shea parkland lies largely underutilized, product quality is generally abysmal (and this commercial fact is well-known by exporters). Nigeria s participation in the value chain is complicated by a divergence in product composition along the Niger River basin butter from the west is solid, with a high stearin to olein ratio, while that from the east is much softer and without value to the stearin-based confectionery market. However, certain Nigerian origins have the highest recorded levels of bioactive unsaponifiables, which should be of interest in high-value skin-care product applications. Other West African countries of origin with significant scope for increased competitiveness include Mali (where problems of product quality contribute to low unit prices to producers), Côte d Ivoire (where cocoa exports have detracted from a supportive policy environment for shea exports), Benin (a known transit country for low-value Nigerian exports which cross the border informally ), and Guinea, where infrastructural and other factors have long constrained shea exports. 4.6 FACTORS THAT WOULD SUPPORT UPGRADING The main factor that would support upgrading is the prospect of increased (global) demand, particularly for higher-quality shea kernel and unrefined shea butter which may be produced at the village level. A related factor would be the willingness on the part of industry to offer a quality premium for products exceeding basic quality values, alongside existing sanctions for quality under stated quality values. Another factor that would support upgrading within the countries of origin would be increased engagement of international companies in supply chains closer to the primary producer level. One significant example is recent investment in value-added processing in Burkina Faso, as per plans currently in development by l Occitane CHAMPIONS FOR CHANGE AAK, Loders Croklaan and IOI/ADM have already been identified as lead firms of the shea value chain of West Africa. While shea kernel has historically comprised some 95% of shea exports from the African continent, prior to establishment of the ADM complex at Tema, current trends point to an increasing export share of shea butter (and its fractions, as more finished products) to serve global markets, as more such infrastructure becomes operational. Buyers and industrial users of shea kernel do impose certain minimal quality standards on the shea kernel they buy (mostly from traders and consolidators, who themselves buy largely from local agents procuring directly from collectors). Procurement contracts no longer include provisions for a quality 5 Justine Humbert, personal communication 2014 Value Chain Assessment Report: Shea 16

26 premium, as was formerly the case (prior to the merger of Aarhus Oliefabrik and Karlshamns into AAK) though penalties do apply beyond the bounds of 8% free fatty acids (FFA). The implications of this fact at the producer level means simply that there is no quality premium paid to the producer to reward her efforts for producing an improved quality shea kernel; some producers thus keep the best of their kernel for home consumption, selling off the poorest quality to serve the kernel market. For this reason, enterprises producing the finest quality butter for export generally need to work with a dedicated producer base to which a quality premium is negotiated. While one producer group interviewed stated that they were willing to pay a voluntary premium for the best quality kernel available on the West African market, it cannot be said that the open market for shea kernel rewards quality ACCESS TO FINANCE Given the scarcity of financial instruments suited to smallholder producers, lending per se is probably an unlikely prospect. However, there are recent trends toward proprietary procurement networks, such as those established Loders Croklaan in Bobo Diolasso, Ghana Nuts in the northern regions of Ghana (which includes indirect benefits such as medical insurance for traders and producers), and the warehouse receipt system and village savings and loan association (VSLA) model of AAK (with SNV) in the Upper West region of Ghana. There is scope for bringing these traders together more formally as a trade association, possibly to be integrated with other professional platforms supported by the GSA PRODUCTIVE INFRASTRUCTURE There are a wide range of possible investment thresholds, ranging from under $20,000 for village-level artisanal unrefined shea butter production to multiple millions of dollars: For example, the Ghana Specialty Fats joint venture of Archer Daniels Midland and Singapore's Wilmar Holdings was valued at $20 million for a processing capacity of 25,000 MT of shea kernel annually SYNERGIES WITH EXISTING PROGRAMS The Trade Hub will be working directly with the GSA and its member entities. Another useful partner will be the ICRAF, which has conducted extensive research on the natural variation of shea butter across the Africa region (including definition of provenances by geographic origin). They have also completed a detailed phytochemical research on the relationship between village-level processing methods and product quality and defined regional codes of (best) practice for shea processing. ICRAF has elaborated national and inter-governmental product quality grades and standards for shea kernel and shea butter in collaboration with ECOWAS and the standards bodies of its member countries, and developed visual training materials (later reprinted by FAO in Mali). A member institution of the GSA Sustainability Committee, ICRAF is currently developing a regional program on shea to support regeneration and sustainability of the shea resource across Africa, with direct engagement of smallholder producers and producer groups POLICY ENVIRONMENT There is an unfortunate tendency to fix price floors in some countries (notably Ghana and Burkina Faso), often with unfortunate results. In Ghana, a state-mandated system of commercial control existed until 1992, against the trend of market reform to which the Government of Ghana was obliged by multilateral finance institutions. During this time, rural producers (pickers and processors) faced low prices, delayed payment, and erratic collection schedules which obliged them to bear all risk for Value Chain Assessment Report: Shea 17

27 deterioration of their product in storage regardless of how long they waited for their product to be taken by the licensed buyers of the Cocoa Marketing Board. This system, in which poor, uneducated and female pickers of northern Ghana were forced by the State to sell only to a network of educated, male buyers from central and southern Ghana through a system of Shea Nut Farmers Societies (SNFSs), institutionalized disparities on three axes class, gender and region which disenfranchised the primary producer to an extent that the shea sector has never been able to realize its potential as a commodity of equal significance to cocoa at the policy level 6. After1992, the SNFS model was eventually dismantled, and Ghana s shea sector opened to the global influence of the international market, though tensions between private sector development and state control of the shea market has continued. Rural producers of northern Ghana have never been afforded the political support required to bring shea to its rightful place as a commodity of national significance comparable to cocoa. Though the national mandate on shea research and development has long been vested in the Cocoa Marketing Board and its Cocoa Research Institute of Ghana (CRIG), neither has ever had a budget for development of the shea resource. Recent efforts (2006 to date) led by a consortium of actors convened by SNV and its partners have brought some success in raising national political awareness of shea, including key actors of the Cocoa Marketing Board, but a concerted transregional effort is required to consolidate these incremental gains at the national level. 4.7 CLIMATE RESILIENCE AND ENVIRONMENTAL SUSTAINABILITY The shea tree is naturally-occurring and is neither planted nor cultivated. Its maintenance in agricultural landscapes contributes to stability and productivity by protecting against soil erosion and conserving soil moisture. Among the effects of climate change, producers identify reduced yields in recent years 7. Particularly in the drier countries where agriculture has intensified beyond a fallow period, regeneration (and thus sustainability) of the shea resource is becoming a serious issue. Environmental impacts of shea processing include the use of water and wood in the parboiling and drying of shea kernel as well as extraction and post-extraction processing of shea butter. Climate-smart technologies might include solar driers and possibly use of propane gas for heating (although propane gas is generally expensive and often locally unavailable). Mitigation of wood fuel use through planting of woodlots is another avenue toward resource sustainability and minimizing environmental impacts. 4.8 OTHER HURDLES TO SUCCESS From a regulatory and legal perspective, prospects for increased demand for shea kernel are linked to the current efforts of the GSA to successfully lobby for USDA approval of shea butter as an alternative to cocoa butter in confectionery products. In 2003, shea butter was recognized as an edible ingredient generally recognized as safe (GRAS). 6 Chaflin, Brenda (2004). Shea Butter Republic: State Power, Global Markets, and the Making of an Indigenous Commodity., Routledge: New York. 320 pp. 7 Masters, E. (2009). Looking Ahead in West Africa : Climate Change, Shea Production and Adaptive Strategies. Fairtrade Foundation: London. 90 pp. Value Chain Assessment Report: Shea 18